The economics and politics of instability, empire, and energy, with a focus on Latin America and the Caribbean, plus other random blather and my wonderful wonderful wife. And I’d like a cigar right now.

January 23, 2014

Soyuzneftegaz and Syrian offshore gas

Upon reflection, it is possible that Russia might gain from its involvement in Syria. But a lot of things will have to go right.

The state-owned Soyuzneftegaz has signed an exploration deal with the Syrian government. Soyuzneftegaz will spend $15 million on exploration and drill at least one well for $75 million.

The thing is, development and exploration cost Noble way more than $90 million, and Noble is one of the most efficient companies in the business! Noble hoped to drill its first exploratory well in the Tamar field for $40 million ... it cost $145 million. In the Leviathan field, planning and three exploratory wells cost $800 million. Ultimately, Tamar cost $3.25 billion to develop over four years.

And note that Noble really is best-in-class. The below chart shows depth on the vertical axis, time to production on the horizontal, and represents the amount of resources by the size of the circle. (The data come from Goldman Sachs Top 360 Projects Survey; the chart is from Noble.) Noble projects are in yellow: they take noticeably less time to complete.

A group of my students carried out a valuation exercise for the Tamar field. They calculated it as $2.51 billion, net of development costs ... but the Tamar field is aimed at the Israeli domestic market. Syria right now does not have much of a domestic market.

This sounds terrible ... but if Soyuzneftegaz finds gas it can always sell its stake. My students’ preliminary estimate of the value of the Leviathan field (assuming LNG for export) is $4.1 billion. That value, however, is contingent on being able to bring Leviathan on-line by 2016 ... the more you push it back, the lower it goes.

In other words, if Soyuzneftegaz gets serious about exploration, and if it finds gas, and if a market can be found for that gas, then the field might be sold. Maybe for $4 billion, maybe for $2 billion, likely for much less.

And right now Soyuzneftegaz does not look serious, not unless it commits a lot more than $90 million to exploration.

But when you think of the agreement to spend $90 million as an option, it does not look like a bad deal for Soyuzneftegaz’s owners, e.g., the Russian Federation. I am skeptical that Soyuzneftegaz will find gas in a reasonable amount of time, but the Assad regime is unlikely to renegotiate any deals.

Moreover, Russia is almost certainly selling arms to Syria on credit: if it gets paid (a not inconsiderable if, but so far Syria seems to be paying) then the net cost of involvement will be positive: profits + interest + the value of any gas less the opportunity cost of the loans to Syria + $90 million.

Add that to the satisfaction of seeing Russian classes in Damascus and the spiritual happiness from pretending that a bunch of piers are a real overseas naval base, and yeah, Moscow’s involvement starts to make some sense. Not much ... but some.

Comments

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As an option, it makes sense. And it's consistent with Russian behavior elsewhere, i.e. in the Balkans. In Serbia, they're basically selling a package -- investment, political support both domestically and at the international level, golden parachute jobs for key politicians, almost certainly intelligence sharing as well. Syria is looking rather similar, except with fewer maudlin protestations of Orthodox brotherhood and more arms sales.